This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
The UK economy has certainly been through a lot since 2020. COVID-19 led to widespread lockdowns, a short market crash and a shift to remote working. GDP grew by 7.5% in 2021, rebounding from a 9.4% plunge the previous year, but a reckoning was soon coming.
Inflation rose in 2022, partly due to pandemic-related supply shortages but also because of rising global wholesale prices in energy and food (following Russia’s invasion of Ukraine). Today, in 2023, living costs remain high and many are asking what lies ahead for UK households and investors.
Below, our Padiham financial planners explore some of the latest data and forecasts to offer some reflections. We also include some ideas to help you continue progressing towards your financial goals in the months ahead.
We hope this content is useful to you and please contact us if you want to discuss your financial plan with an experienced financial planner in Padiham.
UK narrowly misses recession
75% of Britons believed that the UK entered a recession in 2022. Yet data released in early 2023 showed that the country narrowly avoided it.
In fact, the UK was the fastest-growing country in the G7 group of nations in 2022. Yet the Chancellor, Jeremy Hunt, has cautioned that the UK is “Not out of the woods yet”.
Indeed, government forecasts suggest that real household incomes could fall by 7% over the coming years as surging living costs eat into wages. Energy and food, in particular, have risen sharply and made the UK a “Poorer country”, according to the Institute for Fiscal Studies.
Inflation – which measures the overall rise in prices in the economy – currently stands at a 41-year high (10.1%). The Bank of England (BoE) expects inflation to fall later in 2023 as wholesale prices come down, but it has stayed stubbornly high so far.
Gloomy outlook for housing
To try and control inflation, the BoE has been steadily raising interest rates since late 2021. At that time, rates stood at 0.10%. Today, they stand at 4.50% – the highest level since the 2008 Financial Crisis.
One common effect of higher interest rates is lower asking prices for house sales. This is because homeowners cannot afford to borrow as much (since the interest rate on their monthly mortgage payments will be higher).
This is a big reason why big lenders have forecast an 8% fall in house prices in 2023. Higher living costs are also acting as a dampener on prices as more people struggle to put money aside for a deposit.
More British workers could rejoin the market
The UK labour market has been described as “tight” for the majority of 2022, which means that job openings have been plentiful and available workers have been scarce.
Many businesses have struggled to fill roles, leading 72% of employers to higher than anticipated salaries to attract limited talent. Lots of older workers chose to retire early in the aftermath of the 2020 pandemic, leaving more gaps in the workforce.
However, in 2023 there are signs that this may be starting to change. PWC expects 300,000 workers to rejoin the market this year. Many of these could include older workers “un-retiring” as they struggle to meet today’s higher living costs purely using pension income.
What action should I take?
It is not usually a wise idea to make big financial decisions about what “might happen” in the markets or economy. Nobody has a crystal ball and, if the arrival of COVID-19 reminded us of anything, it is that the future is uncertain and events can change everything.
With that said, the prevailing economic context might influence certain financial planning decisions. For instance, should you “lock in” a new fixed-rate mortgage if you have reached the end of your current deal? Or, should you wait until interest rates possibly fall?
Another consideration is balancing short-term and longer-term financial goals. With living costs now higher than in previous years, more people may feel pressure to devote more income to their immediate budget.
However, how can you still continue to save each month and build up your future retirement fund? It may be tempting to neglect or “pause” this (e.g. opting out of a workplace pension), since it seems further away and less important. Yet this would likely be a mistake. Seek independent advice first to explore your options.
What about those in retirement who are feeling financial pressure? Should you come out of retirement and return to work? This is a very personal decision and requires careful thought.
Naturally, “un-retiring” could help you boost your income. Yet it can be physically and emotionally challenging for some people (e.g. if you do not have the energy you once had). Also, you may be more restricted in your financial planning options.
In particular, if you have already started accessing pension benefits, then you have likely triggered the Money Purchase Annual Allowance (MPAA) rules. In 2023-24, this limits your pension annual allowance to £10,000 rather than a maximum of £60,000. This can make it harder for you to build up further pension savings out of your salary.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
